Noel Whittaker: Negative gearing’s not the spanner in the works in the housing crisis this election time

Housing is almost always front and centre during election campaigns and a flood of opinions is swirling around ways to solve the housing crisis in the lead-up to this Federal poll. One of the least realistic comes from the Greens: scrap negative gearing and freeze rents. The Greens’ proposal reveals a deep misunderstanding of how negative gearing works and the long-term benefits it brings — not just to investors, but to the broader economy. Let’s start with the basics. Negative gearing simply means that when the costs of owning a rental — interest, maintenance, land tax and insurance — exceed the rent it earns, the investor can offset this loss against their income. Crucially, most people using negative gearing today are in the 30 per cent tax bracket — not the top one. So, if they lose $10,000 a year, the tax deduction is worth about $3000. The remaining $7000 is worn by the investor. It is hardly the “rort” that critics claim. And this is a long game. Take a common scenario. Someone buys an investment property and over the time of their ownership the property goes through three phases. In the first five years, the property is negatively geared and may cost the government $15,000 in forgone tax. In the next five years, it’s neutrally geared: no deduction, no tax. From year 10 onward, it becomes positively geared, generating income and tax revenue for decades. Then, 35 years down the track, the investor reaches pension age. The property has appreciated, but they fail the asset test and can’t access the age pension. To fund retirement, they sell the property and get a large capital gains tax bill. That’s another big payday for the government. So, for a relatively modest up-front cost, the return to the Treasury is enormous. It’s not a loophole; it’s a delayed revenue strategy. Now, imagine if the Greens also got their way on freezing rents. What happens then? Landlords still face rising costs, but their income is locked. Over time, maintenance gets deferred, properties deteriorate and tenants suffer. It’s happened everywhere rent controls have been introduced: think New York, San Francisco and Berlin. Supply dries up, quality crashes and renters end up with fewer options and worse outcomes. The basic principle is simple: the more hostile you make investing in property, the fewer rental homes will exist. And when supply drops, rents rise. But the prize for the most absurd comment must go to Greens MP Adam Bandt, who claimed recent share-market volatility will push Australians to abandon shares and pour into property, driving house prices even higher. That completely ignores how super works. Australians have $4 trillion invested in super — a large part of which is invested in shares — and most of it is locked away until investors reach age 60. You can’t just cash it out to buy a house on a whim. And experienced investors don’t panic in downturns. They ride it out — that’s investing 101. In fact, just recently we saw the biggest single-day gain in the share market’s history. Volatility is normal. It’s no excuse for a panic-driven housing policy. Then there’s the idea that scrapping negative gearing will reduce house prices. Maybe it would. Maybe not. But we already know investor enthusiasm is waning. New restrictions, rising costs and layers of compliance have taken their toll. That’s one reason rental supply is shrinking — and rents are rising. And what about affordability? In Perth, the median house price is around $840,000. Stamp duty on that is about $34,375 — an enormous upfront hit before you’ve even moved in. That’s a huge burden for first-homebuyers. If governments really want to help people into the housing market, they should fix stamp duty and boost supply. Those are the kinds of reform that change lives. Blaming negative gearing just creates noise and solves nothing. ASK THE EXPERT Q: When you receive questions about market volatility, you typically advise staying invested for the long term while keeping at least three years’ expenses in cash. Does this mean simply holding it in a savings account? A: The idea is to avoid being forced to sell growth assets during an inevitable market downturn. Keeping three years’ expenses in cash is shorthand for reviewing your portfolio and budget to ensure the next three years’ planned expenses are covered. If you’re in superannuation, part of your fund may already be in a cash-type option. If you’re a personal investor, you could hold cash in a bank account. You should also consider regular income sources, such as rental income and share dividends. The key is to never be caught short. Noel Whittaker is the author of Wills, Death and Taxes Made Simple and other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.